Former Synapse Execs Had Access To Key Systems Until June 20th, Court Filings Reveal
Data Dispute: Users Caught In Crossfire Between MongoDB, Synapse Trustee; SoLo Funds Settles with PA; Loper & Corner Post Decisions Drop
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If you enjoy reading this newsletter each Sunday and find value in it, please consider supporting me (and finhealth non-profits!) by signing up for a paid subscription. It wouldn’t be possible to do what I do without the support of readers like you!Former Synapse Execs Had Access To Key Systems Until June 20th, Court Filings Reveal
Last Wednesday’s status conference in the ongoing Synapse bankruptcy didn’t offer much hope to end users whose funds are still frozen, with efforts to reconcile and release the remaining funds, approximately $158.6 million, appearing to slow.
One of the focal points of the hearing was an animated argument from the attorney representing MongoDB, a database service that holds information critical to reconciling Synapse’s records with actual funds held at the partner banks and understanding where the shortfall of between $65 million and $96 million came from — but that hasn’t been paid since Synapse filed for bankruptcy in April.
According to communications exchanged between MongoDB and the Synapse trustee, Jelena McWilliams, Synapse owes MongoDB approximately $140,000 for services provided since Synapse filed for bankruptcy.
At the status conference, MongoDB’s lawyer represented that the cost was approximately $12,000 per week. He also lambasted the trustee’s efforts to date to export the data.
MongoDB argues, per the letter sent to McWilliams, that “[t]he Trustee has had unlimited access to its data since her appointment on or about May 24th, with such access still available today. Despite having such access for over 5 weeks, the Trustee has apparently chosen not to export, download or copy the Debtor’s data, instead assuming that MongoDB would simply keep the access open and incur $10,000-$12,000/week on a ‘charity’ basis.”
The scope of the data, according to MongoDB, is approximately 4.1 terabytes, with MongoDB’s lawyer describing the task of backing up the data as being as simple as picking up a box of files left in his office.
Though the production version of the database may be only 4.1 terabytes, there are “snapshots” of the database — copies of it at prior points in time — that exist and may be crucial in understanding transactions that took place, especially in the period during which Synapse cut off banks’ access to its systems for several days beginning on May 11th.
The judge in the bankruptcy case, Martin Barash, emphasized he had an open mind and was not making a ruling, but told MongoDB’s attorney that he was “not impressed by your letter or your legal analysis” and that the company was “playing with fire.”
Ultimately, Barash made emphatically clear that MongoDB does not have relief from the automatic stay, and additionally that, per part 542(e) of the bankruptcy code, MongoDB has an obligation to preserve the data.
The Trustee, financial advisory and forensic accounting firm B. Riley, and Lineage Bank, which has engaged a former Synapse engineer to assist it in accessing and analyzing data, are continuing to work to preserve all necessary data held at MongoDB.
Synapse Execs Had Access To Systems and Records Until June 20th
An interesting element referenced in the data dispute has gone largely overlooked — namely that, despite being removed from their management roles when McWilliams was appointed as Chapter 11 Trustee on May 24th, some Synapse officers and employees appear to have retained access to key systems, including MongoDB, until at least June 20th.
MongoDB’s letter, referencing the Trustee’s June 20th status report, makes clear that on June 20th, the Trustee “obtained administrative access to MongoDB from Synapse’s former officers” —
The former officers include: cofounder and former CEO Sankaet Pathak, former Chief People Officer Jack Doan, former Chief Compliance Officer Jillana Downing, former Chief Customer Officer Derek Drennan, and former Chief Technology Officer Kathleen Fitzpatrick.
The only former Synapse employees known to be in consistent contact with the Trustee are former CEO Pathak and former general counsel Tracey Guerin.
According to the July 2nd status report, the Trustee only gained access to Synapse’s AWS instances, Google Workspace / GSuite Account, Github account, and Atlassian account sometime after the third status reported, filed on June 20th (emphasis added):
Since the Third Report, the Trustee and her advisors have obtained access to the Debtor’s Amazon Web Services account (“AWS”), Google Workspace / GSuite account, GitHub account, and Atlassian account from former Synapse officers and employees. The Trustee was informed that these systems contain important process documentation, historical records, and metadata related to Synapse systems and transactions which will be helpful to reconciliation efforts.
To reiterate: former Synapse employees, presumably including former CEO Pathak, continued to have access to key systems, including MongoDB, until at least June 20th, while the Chapter 11 trustee didn’t gain access until that time.
It’s unclear why former Synapse officers’ and employees’ access wasn’t immediately terminated when McWilliams was appointed on May 24th, and it is also unknown if any former officers or employees accessed or made changes to key systems, including MongoDB, in the time between when the Trustee was appointed and when she gained access to said accounts.
SoLo Funds Settles With Pennsylvania Over Alleged Illegal “Tip and Donation” Scheme
Unlicensed peer-to-peer payday lender SoLo Funds has reached a settlement with the state of Pennsylvania over its alleged illegal “tip and donation scheme” last week.
The Pennsylvania attorney general commented on the news by saying:
“This predatory lender used their tip and donation configuration to deceive consumers into paying outrageous and illegal interest rates on loans. This settlement puts a stop to the company’s manipulative conduct and their ongoing collection efforts, while providing relief to those who were tricked into the scheme.”
The settlement agreement specifically prohibits SoLo Funds from engaging in certain conduct when the borrower or lender is located in Pennsylvania, including:
Making or facilitating loans through its platform where the interest rate/finance charge of the loan exceeded that allowed under Pennsylvania’s Loan Interest Protection Law and Consumer Discount Company Act;
Issuing loan disclosures stating a $0 finance charge for loans made on the SoLo platform where the borrower agreed to pay a tip and/or donation;
Advertising that its loans are “0% APR” with “no finance charge” when the loans include a tip and/or donation; and
Directing collections notices to consumers stating that delinquent accounts will be reported to Credit Reporting Agencies, when in fact SoLo did not report account information to Credit Reporting Agencies.
SoLo Funds will also pay restitution to impacted borrowers of $158,000, civil penalties of $25,000, investigation costs of $25,171.51, and will cease collection efforts on outstanding principal, “tips,” and “donations” involving any borrower or lender in Pennsylvania, which totals over $530,000.
Pennsylvania joins a growing list of authorities who have taken legal action against SoLo Funds, including Connecticut, California, Washington, DC, Minnesota, and, as of this May, the CFPB, which is suing the company for deceiving borrowers with “tips,” “donations,” and “dark patterns.”
Court Watch: Chevron, Corner Post Decisions Likely To Have Far-Reaching Impacts on Financial Services Regulation
The Supreme Court, which has released decisions at the slowest pace in decades this term, dropped opinions on two cases likely to have far-reaching consequences for financial services regulation: Loper and Corner Post.
Loper: The End Of Chevron Deference
The doctrine known as “Chevron Deference,” stemming from the 1984 Supreme Court case Natural Resources Defense Council v. Chevron, required judges to defer to regulatory agencies’ interpretations of ambiguous statutes.
The analytical framework functionally discouraged lawsuits against regulatory agencies, as it recognized that the legislative branch often writes broader statutes that regulatory agencies translate into more specific regulations through notice-and-comment rulemaking processes defined by the Administrative Procedures Act.
The general consensus is Loper Bright Enterprises v. Raimondo, which effectively ends Chevron deference, implicitly shifts power from executive branch agencies to the courts and is likely to herald a wave of litigation against regulatory agencies — including those that regulate banks, like the FDIC, OCC, FRB, and the CFPB, long a thorn in the side of financial services firms.
The CFPB’s recent interpretative guidance that it would treat “pay-in-four” buy now pay later plans as “credit cards” for certain purposes under TILA is a prime example of what some argue is regulatory overreach that could be challenged more easily with the end of Chevron.
However, industry analysts suggest the end of Chevron could be a mixed bag for financial services firms hoping for less-burdensome regulation, as it also makes it easier for advocacy groups and state attorneys general to challenge rules they oppose.
Corner Post Opens Door To Wave Of Regulatory Challenges
The Corner Post case, in which a North Dakota convenience store sought to sue the Federal Reserve System over its debit card interchange caps, turned on the question of the statute of limitations. Corner Post argues that the Fed’s interchange cap was set too high.
The Fed promulgated its debit interchange cap in 2011, pursuant to the Durbin amendment to Dodd-Frank. Federal law sets a six-year deadline for broad challenges to regulation.
Corner Post didn’t start operating until 2018 — after the statute of limitations had passed, the Biden administration argued.
The Supreme Court, however, disagreed. The majority ruled that the six-year clock didn’t start until Corner Post was impacted by the Fed rule, when the store opened for business and began accepting debit cards, in 2018.
Like the Court’s decision in Loper overturning Chevron, the Corner Post case throws open the door to what were once-settled regulations by extending the timeline for legal challenges, though the Court left open whether the extended statute of limitations will apply to all types of regulatory challenges.
The potential impact of Corner Post turns in part on the ability of plaintiffs to ask for universal vacatur of agency regulations, rather than party-specific relief.
As is the case with Chevron, the Corner Post decision has the potential to cut both ways, by potentially extending the timelines for advocacy groups and state attorneys general to challenge regulations, as well as industry actors.
Other Good Reads
JPMorgan Warns Customers: Prepare to Pay for Checking Accounts (Wall Street Journal)
Fintech Takes Rewind — Q2 2024 (Fintech Takes)
Rates didn’t save the banks, but they unleashed Fintech companies (Fintech Brainfood)
Silvergate Enforcement Actions (Bank Reg Blog)
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